A.M. Best Performing Additional Stress Tests Due to Euro Debt Crisis

A.M. Best will introduce another round of stress tests to see how insurers exposed to sovereign debt would fare if the eurozone crisis worsened, said Stefan Holzberger, managing director of analytics with A.M. Best Europe.

"We are analyzing European companies' investment risk and discussing with management the pressure points and their impact on risk adjusted capitalisation," Holzberger said.

Potentially, European insurers could lose up to 143 billion pounds ($193 billion), the equivalent of 24% of shareholders’ funds, if the value of sovereign bonds issued by Greece, Ireland, Portugal, Spain and Italy were to drop by 50%, Swiss Re said in its Global Insurance Review 2011 and Outlook for 2012 and 2013 (BestWeek, Dec. 5, 2011).

That scenario isn't likely, Holzberger said. "We continue to feel that probability is very low, but it's something we need to watch closely," he said. "Considering that the severe down-side scenarios are not as remote as they were a few months ago, it's definitely a concern."

It's important to assess companies on a case-by-case basis, he said. In addition to sovereign debt exposure, companies may also have exposure to European banks that are holding significant amounts of European sovereign debt, Holzberger said.

Many insurers have reduced their holdings of sovereign debt and financial institutions, he said. "We would not prescribe what insurers or reinsurers should be doing, but we do want to know what they are doing to manage those exposures and how sensitive their capital is to further deterioration," Holzberger said.

A.M. Best is speaking with companies that have elevated exposure, he said. "We will be looking very closely at those companies to determine if a rating action is necessary," Holzberger said.

Despite the uncertainty of the eurozone debt crisis, insurers overall have produced "strong earnings despite significant catastrophe losses this year," he said. "Earnings are very robust for many companies that we follow. On a pre-stressed risk-adjusted capital basis, the industry overall is healthy enough to withstand a certain level of deterioration in the economic environment and in their investment portfolios. It comes down to a question of severity," Holzberger said.

To date, A.M. Best Co. has performed stress tests of the balance sheets of insurers’ exposure to eurozone debt in Sept and Nov of this year.

Further weakening of the economic environment holds significant implications for insurers with assets in eurozone countries (particularly Portugal, Italy, Ireland, Greece and Spain) and for those operating in the region. "Although A.M. Best does not forecast a default in Italy—the third-largest bond issuer in the world— there exists a sharp increase in economic uncertainty within the eurozone," A.M. Best said.

(By Meg Green, senior associate editor, BestWeek: Meg.Green@ambest.com)